What to do when financial disaster strikes

Many Americans are unprepared for financial disasters. Eighteen percent of us have less than one month of expenses saved to cover an emergency, according to a recent MassMutual study , while 26 percent have just one to three months of expenses saved.

Emergency savings is a cornerstone of financial wellness. But so are insurance and mutually supportive groups such as family, friends, community organizations, and houses of worship. All of these can help us when we experience potential financial disasters. Unexpected hits to our finances can include a wide range of events, like a:

If one of these or another costly disaster strikes, you may or may not be ready to handle it, depending on your degree of preparation. But beyond that, there are considerations particular to each situation.

Almost everyone has homeowners insurance to protect against a major property loss. However, a standard policy might not cover sewage backup, mold abatement, or termite damage. They often don’t cover damage from major events like earthquakes, wind damage from hurricanes, or flooding, either.

Riders and separate policies are available to cover some of these losses, such as flooding, but even when your loss is covered, you still often have to pay a deductible. In addition, separate premiums and deductibles may apply for structural damage versus contents damage, and policy maximums may prevent your entire loss from being covered.

If you experience a major property loss, that means you’ll pay a lot out of pocket despite your insurance coverage. How do you minimize the damage?

A first step is to look for longer-term options to pay off unexpected expenses, suggested Henry Wong, founder of Friendly 401k and an advisor with Catalina Wealth Management in Tucson, Arizona.

One option is to find an offer for 18 months of no-interest payments on a credit card, Wong said. While he does not advise holding excessive credit card debt, he does recommend taking advantage of offers like these for short-term emergency needs.

Such offers are generally available to consumers with very good to excellent credit. If you don’t qualify, it may be worth considering a 401(k) plan loan.

“An excellent 401(k) plan will allow plan participants to borrow money from their 401(k) or take a hardship withdrawal,” Wong explained. “A 401(k) loan is essentially a loan from the accrued balance in the retirement plan, with interest payable back into the account.”

For plans that don’t offer loans, a hardship withdrawal may be possible. “Hardship withdrawals are not the most financially sound option,” Wong said, but when you have an immediate problem with no other solution, you may have to take the step. “Hardship withdrawals, unfortunately, will incur income taxes plus an additional penalty,” he continued, which means they should be a last resort.

Should you have a permanent life insurance policy, you could also tap into its cash value. However, accessing such funds decreases the death benefit and cash value, and could cause the policy to lapse, which would result in a tax bill.

Before you go that route, consider asking for help. Community organizations often come together to help people down on their luck. ( Learn more: Community helps mosque rebuild )

Few of us expect to get hit by a car while walking through the parking lot, or get diagnosed with cancer, multiple sclerosis, or another serious illness. When we do, the first reaction is often emotional—fear of advancing symptoms, treatment side effects, recovery struggles, and lost opportunities. Our second reaction often relates to money: How on earth am I going to afford all this?

One problem is that for many people, insurance is attached to work, and a serious illness or major accident may lead to job loss and a loss of insurance. And it’s not just health insurance that’s at stake: it’s also life insurance and, perhaps, disability insurance — right at the time those policies become most valuable.

While there's no surefire way to prevent financial stresses ― including bankruptcy ― due to medical issues, carrying your own insurance that isn’t tied to your job can help.

Disability income insurance will help replace a significant percentage of your income should you become too sick or hurt to work. You’ll typically wait 90 days from the date a covered disability occurs before payments begin.

Life insurance can provide for your family if you don’t make it through your misfortune. It can also provide, through insurance riders often purchased at additional cost, accelerated benefits that help with living expenses and medical bills. And, as noted earlier, for certain types of permanent insurance, there’s the option of accessing the policy’s cash value, although such a payout will reduce the policy’s death benefit and cash value, possibly incur a tax bill, and increase the chance that the policy will lapse.

If you've lost your job remaining on your employer’s health insurance plan, albeit at a steep cost, may be an option through COBRA. Another option could be getting on your spouse's or partner’s plan. There’s also the government health insurance exchange. It lets you sign up outside of the regular open enrollment period when you experience a qualifying life event , such as losing job-based health coverage.

You might be able to trim your grocery budget, use utilities more judiciously, and eliminate restaurant meals and live events. Pass on nonessential travel; if you need to visit family, ask if they can help with plane fare or put you up.

When forced to scrutinize our spending , we often find we can cut more than we think. This reexamination can also help us rebuild savings once we’re getting paid again.

What’s “huge” depends on your financial situation; it might be a car repair that costs a few hundred dollars, or it might be a lawsuit that costs tens of thousands. And what’s unexpected often depends on our planning skills.

For some people, for example, a tax bill could be unexpected. That could be because they forgot about a property tax assessment or didn’t adjust withholdings following a change to tax regulations. Other people may have budgeted for irregular but recurring expenses, like taxes, car repairs, and even a new roof, but can still be caught off guard when too many big expenses hit at once.

The most important thing to do when an unforeseen expense occurs is to relax and reevaluate, said Michael Chapman of Chapman Insurance Solutions in New York City. “A calm head makes level-headed decisions. It results in a better understanding of the situation and the best way to go about it,” he explained. “However, relaxing must be coupled with reevaluating.”

That means taking a look at assets, such as cars, home equity, and available capital in a checking account, savings account, investments, or business; liabilities, such as credit card bills and auto loans; and expenses that may be unnecessary, such as morning coffee or cable television. This reevaluation will give you an idea of where you can pull funds from and what expenses you can minimize to allocate money to the unforeseen expense, Chapman said.

For problems you can’t insure against, your best option is an emergency fund. For those with whole life insurance, tapping the cash value is a possibility, although, as noted earlier, it has repercussions.

“At the end of the day, my experience has shown me that the best way to win is by avoiding a loss,” Chapman said. “That is why proper planning is so important. It can help shield you and your loved ones against the loss that is suffered by an unforeseen circumstance. It helps you and your family ensure that you don’t fall behind when the unexpected happens.”

One of our financial advisors can contact you to discuss taking care of loved ones, a family business, or a group of employees.

The information provided is not written or intended as specific tax or legal advice. MassMutual and its subsidiaries, employees, and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own, and do not necessarily represent the views of MassMutual.

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